New insolvency reforms set to assist directors

23 October 2017

Jodi Leonard, Manager, Business Restructuring |

A new law has been introduced to create a ‘safe harbour’ which may allow directors some relief from the current insolvent trading provisions.

Essentially, it will allow directors to incur company debts during a ‘restructure/turnaround period’ without the risk of being held personally liable for those debts if they cannot be repaid.

The new provisions provide BDO Business Restructuring the opportunity to assist clients who may be concerned about the solvency of their business and want to explore options outside formal insolvency appointments. 

The new law – what has changed?

Previously, a director who continued to trade a company while being unable to pay their debts when they fall due (i.e. trading insolvent), could be personally liable for the debts incurred if the company entered into liquidation.

The new ‘safe harbour’ legislation allows directors relief from this personal liability and the opportunity to continue to trade the company under distressed circumstances, provided they are taking a course of action reasonably likely to lead to a better outcome. 

The safe harbour only extends to debts incurred in connection with the course of action or its development. The protection ceases when the course of action stops being likely to lead to a better outcome.

What directors need to know to gain access to safe harbour

To rely on safe harbour, directors must:

  • Continue to meet their employee entitlements (including superannuation) and tax reporting obligations
  • Be able to provide assistance and/or documentation if requested by an external administrator  
  • Start developing one or more courses of action that are reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator or liquidator.

Factors that will be considered to determine if the course of action was reasonably likely to lead to a better outcome are:

  • Obtaining appropriate advice
  • Maintaining proper financial records
  • Keeping themselves informed of the financial position of the company
  • Taking steps to prevent misconduct by officers and employees of the company.

Things to remember 

For the best chance of relying on safe harbour while a turnaround strategy is implemented:

  • Be proactive and seek advice early
  • Engage in qualified advisers who specialise in turnaround and restructure plans 
  • Ensure all reporting obligations and employee entitlements are up to date
  • Document plans and decisions to provide evidence if safe harbour protection is challenged.

Timing is important – the course of action must be implemented within a reasonable period. This can vary depending on the size and complexity of the company.

Other changes impacting termination of contracts

Ipso facto clauses, a common clause found in many commercial contracts, allows one party to a contract to terminate or amend the agreement upon the occurrence of an insolvency event.

A new provision set to come into effect in July 2018 will allow for a hold against the enforcement of these rights to terminate a contract. 

The hold will apply to: 

  • Schemes for the purposes of avoiding being wound up in insolvency
  • Managing controllers appointed to a company
  • Voluntary administrations.

This is another positive change to allow companies to protect asset values and allow continuation of trade while a restructure of the business takes place.

For more information, contact a BDO Business Restructuring adviser.